The Impact of Increasing Search Frictions on Online Shopping Behavior: Evidence from a Field Experiment

Abstract

Online retail accounts for a rapidly growing proportion of revenues in many industries. While selling online broadens firms’ access to consumers, operating margins are often lower in online stores than in physical stores. There are well-recognized reasons for this discrepancy: prices are easy to compare online, discount coupons and codes have high uptake, and sellers often bear the cost of shipping products to buyers. In addition to these factors, online selling precludes many methods of price discrimination exercised in offline environments. Many online stores present few barriers to accessing discounted products. We propose that deliberately increasing search frictions by placing obstacles to locating discounted items can improve online retailers’ margins and increase conversion. We demonstrate using a simple theoretical framework that inducing consumers to inspect higher-priced items first can simultaneously increase the average selling price and the overall purchase rate. We test these predictions in a series of field experiments conducted with an online fashion and apparel retailer. Using information from historical transaction data about each existing consumer, we demonstrate that price-sensitive shoppers are more likely to incur search costs in order to locate discounted items. Our results show that adding search frictions can be used as a self-selecting price discrimination tool to match high discounts with price-sensitive consumers and full-priced offerings with price-insensitive consumers.

More from these Authors

Shipping fees are an important aspect of online retail for both consumers and sellers. A common fee structure is contingent free shipping, in which consumers are granted free shipping for basket sizes above a minimum value and are charged a flat fee for orders below this threshold. We seek to characterize how contingent free shipping influences purchase outcomes in a multi-category shopping environment. We build a demand model in which consumers choose how to allocate their spending over different product categories to maximize their direct utility under contingent free shipping. We estimate model parameters using transaction data from a pure online fashion retailer. We find that, relative to offering free shipping, offering contingent free shipping increases basket sizes by encouraging consumers to meet the minimum order threshold. Consumers incur search costs to meet this threshold exactly; sellers may benefit from maintaining high search costs to encourage overshooting. Moreover, we find that contingent free shipping shifts demand to more popular products and that the effects of category-level price changes on profits depends on the active shipping policy. Our findings demonstrate the importance of jointly determining product assortment attributes and shipping fee policies.

We investigate how dynamic pricing can lead to more product returns in the online retail industry. Using detailed sales data of more than two million transactions from the Indian online retail market, where price promotions are very common, we document two types of strategic customer behavior that have not been considered in previous research. First, customers who monitor product prices after purchase may initiate opportunistic returns because of price drops. Second, customers who anticipate a future return may strategically choose a payment method that facilitates product returns. Our logistic regression models indicate that (1) realized post-purchase price drops lead to a higher probability of return, and (2) anticipated price drops after purchase lead to a higher probability of using cash on delivery, a payment method with a lower return cost for consumers. Our findings are robust to alternative model specifications and sample selection procedures. We demonstrate that an optimal pricing policy should take into consideration the potential costs of two types of strategic customer behavior: opportunistic returns and strategic choice of payment method.

By late 2017, Brazilian retailer Magazine Luiza's CEO was convinced that the company could significantly grow sales and accomplish its aspirations of digital transformation. What was unclear in his mind was whether he should act as a tech company and grow as fast as possible (e.g., high double digits) or be more conservative and grow sales at a financially healthy rate, like traditional retailers did (e.g., single digits). The primary way e-retailing companies achieved these abnormally high rates of growth was through lowering prices and foregoing profitability. Historically, mass retailing had razor-thin margins. It was thus unlikely that he could have it both ways: grow fast and be profitable. Should Trajano opt for more aggressive growth or proceed more conservatively?